- The Financial Times – Trump administration’s ultra-long bond talk faces scepticism
Meeting this week will examine demand for debt maturing well beyond 30-year limit
The Trump administration’s interest in issuing the US government’s first “ultra-long” bonds, following in the footsteps of countries such as the UK, Mexico and Belgium, is facing scepticism from fund managers, analysts and former officials. The US Treasury in April asked its “primary dealers”, the club of banks that underwrite and arrange the government’s debt sales, to explore whether there would be demand for Treasuries that mature well beyond the current 30-year outer limit. This may open the door for even issuing “century bonds” maturing in 100 years. Later this week, the Treasury will unveil its quarterly funding plans and meet bankers, traders and asset managers to discuss investor demand, including for new long-maturity bond issuance. But the Treasury has repeatedly explored the possibility, most recently in 2014, and always decided against it. There remain serious doubts that the case is any stronger this time around.
Comment
As we said late last year:
We agree the Treasury should be offering 30-year, 50-year, 100-year and perpetual bonds. One should match their liabilities (debt) with the average maturity of their assets. Since the United States (the asset) is nearly 240 years old, a longer maturity schedule makes sense.
Why doesn’t the Treasury operate this way? The Treasury Auction Borrowing Committee may have its own agenda.
This committee is made up of investment managers (hedge and long-only) as well as big bankers. They meet quarterly to “advise” the Treasury on the country’s borrowing needs.
The TABC wants the Treasury to issue benchmark securities that are convenient for corporate bond issuers and the mortgage market, so we have 2-yr, 5-yr, 10-yr (as these best match the typical length of corporate assets) and 30-year ( the benchmark for the mortgage market) notes and bonds. The TABC also wants securities that are convenient for cash managers, so we have 1-month, 3-month, 6-month and 12-month bills.
Then you get the ultimate perversion – floating rate notes (FRNs). The first one was issued last week after a multi-year fight for approval (we argued against them in 2012). The TABC wanted these as they help banks and money managers. But how does issuing billions and billions of floaters at 0% help taxpayers? They only have one way to float, higher. These securities shift the reinvestment risk from the fund manager (who is stuck with low-yielding securities when rates start to rise) to the taxpayer (as these floaters reset every day, so the taxpayer is at maximum risk when rates rise).
We have no problem with the TABC members. Each member of the committee advocates his or her own interests, as they should. Unfortunately nobody on the committee advocates for the taxpayer. So, we fault the Treasury for the make-up this committee. Why doesn’t the Treasury replace a few hedge fund managers with taxpayer advocates?
And regarding the concern that ultra-long securities will be hard to sell:
In the last 20 years, the Treasury started selling Treasury Inflation Protected Securities (TIPS) and Floating-Rate Notes (FRNs). Initially, both markets suffered from chaotic trading and a lack of liquidity. This is what happens with new offerings from the Treasury. So in one sense, the concerns above are a statement of the obvious. If this is one argument being used against issuing longer-dated maturities, then the Treasury should never offer any new products.
Our guess is the Treasury will push forward with ultra-long securities. Even if dealers would be uncomfortable with the market, in the beginning, the potential benefit to taxpayers should outweigh these concerns.